FTC Negotiates Settlement That Preserves Competition in U.S. Market for Pigskin and Beef Hide Gelatin

FTC Negotiates Settlement That Preserves Competition in U.S. Market for Pigskin and Beef Hide Gelatin

March 7, 2002

The Federal Trade Commission has negotiated a settlement designed to remedy the alleged anticompetitive effects resulting from the proposed $170 million acquisition of Leiner Davis Gelatin Corporation and Goodman Fielder USA, Inc. by Deutsche Gelatine-Fabriken Stoess AG (DGF Stoess). If consummated as proposed, the transaction would eliminate strong, head-to-head competition between DGF Stoess and Leiner Davis (a subsidiary of Goodman Fielder), and the two firms combined would account for more than 50 percent of the U.S. market for pigskin and beef hide gelatin. These gelatin products are used primarily by the food industry as an ingredient in edible products and by the pharmaceutical industry to produce capsules and tablets. Under the terms of the proposed settlement, DGF Stoess would not acquire Goodman Fielder's entire gelatin business; rather, Leiner Davis would retain its United States and Argentine gelatin plants and all of the infrastructure, assets, and personnel related to those plants.

Additionally, to protect against any anticompetitive effects resulting from a possible decision by Goodman Fielder to exit the gelatin business, the proposed settlement requires Goodman Fielder to obtain prior approval from the Commission if it later decides to divest its retained assets in either of three specific ways that would raise competitive concerns, and to provide prior notice to the Commission of any other disposition of the assets.

"The consent agreement allows the parties to complete a modified version of their transaction, while ensuring that Leiner Davis retains all of the necessary assets, including two plants, personnel, and infrastructure, to maintain the current level of competition in the U.S. market for pigskin and beef hide gelatin," said FTC Bureau of Competition Director Joseph J. Simons.

DGF Stoess, headquartered in Eberbach, Germany, is the world's largest producer of gelatin. The company produces gelatin at eight manufacturing plants around the world, two of which are located in the United States.

Goodman Fielder is a diversified food products company based in Sydney, Australia. Leiner Davis Gelatin, a subsidiary of Goodman Fielder, is the second-largest producer of beef hide and pigskin gelatin in the world. Leiner Davis also owns and operates eight gelatin manufacturing plants around the world, with one plant located in the United States.

Under a purchase agreement dated February 14, 2001, DGF Stoess proposed to acquire Goodman Fielder's entire worldwide gelatin business, a transaction valued at approximately $170 million. The FTC began its investigation of the proposed acquisition in March 2001. In response to the competitive concerns raised by the Commission during its investigation, DGF Stoess proposed to divest one of Leiner Davis's eight plants. This proposed divestiture, however, fell short of replacing the competition of either Leiner Davis or DGF Stoess in the relevant market.

On January 15, 2002, the FTC authorized its staff to seek a preliminary injunction in federal district court to prevent DGF Stoess and Goodman Fielder from consummating the transaction. The proposed agreement announced today arose out of discussions between the FTC and DGF Stoess and Goodman Fielder prior to the Commission's filing of a complaint seeking a preliminary injunction. Under the revised purchase agreement, Goodman Fielder would not sell its entire gelatin business to DGF Stoess, but rather, it would retain two of its plants in the Americas - a pigskin gelatin manufacturing plant in Davenport, Iowa, and a beef hide gelatin plant located in Santa Fe, Argentina - along with all of the ancillary assets and infrastructure (e.g., production personnel, sales operations, etc.) required to operate those plants together as an ongoing business. According to the FTC, by retaining two substantial gelatin plants, Goodman Fielder's U.S. presence, combined with the Davenport and Santa Fe plants, is virtually the same as that of DGF Stoess before the acquisition. In accepting the proposed consent for public comment, the Commission has determined that the restructured transaction would leave Leiner Davis in the gelatin market as a fully viable firm, as competitive with DGF Stoess as it was before the merger.

Although Goodman Fielder's retention of the U.S. and Argentine plants largely remedies the anticompetitive effects of the proposed acquisition, several competitive questions remain because Goodman Fielder previously has expressed the desire to exit the gelatin business. Accordingly, the Commission has included additional provisions in the proposed consent agreement addressing a subsequent decision by Goodman Fielder to dispose of the assets it has agreed to retain. First, another attempt by Goodman Fielder to sell its Leiner Davis subsidiary to DGF Stoess would replicate the acquisition the FTC just sought to enjoin. The proposed consent agreement, therefore, prohibits DGF Stoess from acquiring Leiner Davis's U.S. and/or Argentine gelatin assets without prior approval from the FTC. Second, a subsequent sale of the retained assets to SKW - the third-leading supplier worldwide of pigskin and beef hide gelatin - would raise many of the same competitive concerns raised by a sale of those assets to DGF Stoess.

According to the proposed consent agreement, Goodman Fielder may not sell any of the retained gelatin assets to SKW without prior approval from the FTC. Third, if Goodman Fielder were to split the assets and sell one plant to one buyer and the other plant to another buyer, the entity that the Commission relied upon to replace the competitive presence of DGF Stoess in the United States (with volume, geographic scope, and product breadth) would no longer exist, leaving two lesser competitors instead. To remedy this concern, the proposed consent agreement prohibits Goodman Fielder from selling less than the complete package of retained assets without prior approval from the FTC. Finally, the proposed consent requires Goodman Fielder to provide the FTC with prior notice of any other sale of the retained assets, as such a sale may raise competitive concerns and may be unreportable under the Hart-Scott-Rodino Act.

The Commission vote to accept the proposed consent agreement was 4-0, with Chairman Timothy J. Muris not participating. A summary of the proposed consent agreement will be published in the Federal Register shortly and will be subject to public comment for 30 days, until April 8, 2002, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, the proposed consent agreement and an analysis of the agreement to aid in public comment are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.